Tuesday, February 1, 2011

Baidu (BIDU) did it's normal thing last night in earnings, and with Google (GOOG) effectively neutered in China has little to fear in the near to intermediate term in the Chinese search engine space. However, with the global buzz about social networking now reaching the same fever pitch we heard in the late 90s during the original internet revolution, Baidu waved a green flag to investors saying "we're gonna be a social networking company too!" Of course investors are giddy because just like in 1999 they think every company will thrive and there will be no competition or crowding out. :) [I too shall be starting a social networking site; the details don't matter - I just want my own valuation to rise 20x overnight] That said, Baidu is dominant in search - no way around it.

Technically the stock has not participated in this nearly half year rally led by The Bernank, which led many (me included) scratching our head. But with a huge multi month base to work with, the stock has an excellent technical condition to break out from, as long as the greater market remains benign.

Baidu Inc beat fourth quarter estimates and painted a bright near-term outlook as it bets on large advertiser spending and new Chinese Internet trends, such as social networking, to spur growth.

"The key attractiveness of Baidu is that they are the one and only one in China, they rely on the China story, the high growth Internet market and in particular search, and there's no other key competitor in the market," said Benjamin Tam, a Hong Kong-based portfolio manager with Investors Group.

Baidu, which has increased its focus on e-commerce and online video, grabbed more market share last year after rival Google Inc curtailed its operations following a high-profile fallout with Beijing over censorship. Baidu is the No. 1 Internet search engine in China with a 70 percent market share.

The company breezed past Wall Street financial targets in the fourth quarter and reported a higher-than-expected first-quarter revenue outlook. Beijing-based Baidu's fourth-quarter net income rose to $175.9 million, or 50 cents a share, from $62.7 million, or $1.80 a share, a year ago, before a 10-for-1 stock split. That beat analysts' average forecast of EPS of 45 cents.

Total revenue in the fourth quarter totaled $371.3 million compared with $184.7 million a year ago. Analysts, on average, had expected revenue of $360.3 million.

One of the key focuses for Baidu in 2011 will be in social search, executives said at its call with investors. "Social search products represent a significant portion of our total traffic and it continues to grow at a rapid speed," said Baidu's CEO Robin Li said. "As time passed by we realised the commercial value of this product...So we are developing commercial products or ad products for social search services and going forward we expect to better monetize this kind of traffic," Li said.

Local media reported over the past month that Baidu might invest into Sina's hot microblog product Weibo. Baidu declined to comment on market speculation but Li said on the call that the firm was open to opportunities that "make sense" strategically for Baidu.

Despite the upbeat outlook, some analysts warn of risks. For the fourth quarter, Baidu had 276,000 customers, a 24 percent increase over a year ago but only a 1.5 percent increase from the previous quarter.

"This quarter only grew by 4,000 (customers) it's not the lowest. In Q4 2008, it grew only 3,000 additional customers, but having said that, we had the financial crisis back then," said Wallace Cheung, a analyst with Credit Suisse. "I wouldn't say (the numbers) are very bad, but it's definitely not good enough," Cheung said.

Analysts also see an increasingly competitive landscape in China's search market in the coming years, as players like Sohu.com , Alibaba Group and Tencent Holdings wrestle for market share.

Acquisition costs dropped:

Baidu’s cost to acquire traffic during the quarter declined, perhaps reflecting less competition from Google. Traffic acquisition cost (TAC) was 8.1% of revenue in Q4, down from 8.9% in Q3, and well below 16% in the year-earlier Q4. TAC for the full year was 9.6%.

Guidance:

Baidu said revenue for the first quarter will come in between $360.6 million and $371.2 million, ahead of the average analyst forecast of $354.2 million.

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